Here’s a note from a reader
Charles Feb 3, 2009
Tim, I am a consultant in the nuclear industry and have a sole proprietorship that I want to take to the next level of at least an LLC. I have studied the differences and the pros and cons of LLC vs S Corp. One of the things that has not been clear, that perhaps you can answer…are the tax advantages as applied to leased equipment/vehicles, etc better under an S Corp or LLC or are their any differences. I could go pay a tax consultant the question but, hey if you know, why not give the answer to all of us. Thanks in advance.
Hi Charles,
What is best for YOU?
Thanks for sending in your question. I’m no attorney but I will share what I’ve learned from my experiences. I started my first business (Schmidt Engineering, Inc.) as a C-Corp. As it turns out, this was a mistake, mostly because I ended up being taxed twice on profits. So, I changed that business to a S-Corp after a few years. As you mentioned in your message, an S-Corp allows your business profits and losses to simply get reported on your personal income tax return, so you only have to pay taxes once.
When I started Delta Media, I just made it a LLC right away. I can’t completely remember why but I think it had something to do with the fact that it was less expensive and less time-consuming (from a paper-work perspective) than setting up an S-Corp. I think I remember my lawyer telling me that the ONLY reason that I should even consider an S-Corp is if I wanted to be able to put “Inc.” after the name of my business. But nowadays, there are tons of LLC businesses and having the “Inc.” at the end of your business offers no extra credibility!
DISCLAIMER: Okay, this disclaimer is for any attorneys who are reading this and thinking, “What the heck is this guy doing offering legal advice?” Here’s the deal, I am NOT a lawyer… I’m just sharing some of my experiences. Anyone reading this blog is smart enough to realize that each individual situation is different and it’s probably a good idea to talk to a REAL attorney. 
Best of luck Charles
Take care,
Tim Schmidt
February 13th, 2009 at 12:03 pm
Tim thanks for this. It helped to clear this same question for me
February 13th, 2009 at 12:04 pm
I’d back up all of your thoughts, Tim. I started a computer technical support company last July and I received the same advice (at the cost of attorney’s fees, of course. Live and learn!).
One additional consideration to make is the future of the company - I was told that it would be easier to transition the business into a full corporation from an S corp rather than an LLC. So if one is interested in one’s business growing into a full corporation someday, it may be a good idea to pay for legal advice.
February 13th, 2009 at 1:06 pm
There are significant tax differences between an LLC and an S corp. You can save significant social security taxes with an S corp as compared to an LLC. By the way, an S corp is a “full corporation”. S corp versus C corp only designates how the corporation is taxed. The legal entity in both cases is the same. In Minnesota the cost to set up either an LLC or a corporation is the same.
February 13th, 2009 at 1:44 pm
Tim,
Here’s another point of view: I’ve formed half a dozen LLC’s as companies for investment vehicles or for supporting creative efforts. One was for owning a restaurant. Besides being more simple to set up, an LLC offered better protection from potential litigation. Only the assets in the LLC were at risk for any lawsuits, whereas in a corporation, my personal assets, beyond any attached to the business, were at risk. I’m not an attorney, but this was the advice one gave me.
February 13th, 2009 at 3:13 pm
I just recently started my gunsmithing company as an LLC. I didn’t consult an attorney but I did talk to an accountant and tax person. They recommended for my situation to go LLC instead of S Corp due to my single person operation and the significant difference in paperwork requirements as an S Corp. Who needs the additional headaches of all that paperwork.
February 13th, 2009 at 4:16 pm
Tim and commenters,
Thanks for the answer and the additional insight. Like some of you, I probably will pay an attorney to confirm what I’ve gleaned here and feel stupid for having done it, but the lawyer can answer the question based on the specifics of my situation. I plan to have other consultants working as 1099’s to me (subcontracted — not employees), so the company will provide some additional income over my work, but will also provide some tax shelter…given the current national situation, I believe we’ll all need some tax shelter.
Thanks again!
February 13th, 2009 at 5:11 pm
As long as you make the partnership taxing declaration on your LLC, your income is taxed the same as a partnership or S-Corp on the 1040.
February 13th, 2009 at 10:14 pm
An LLC can easily be taxed as an S Corp. Both have tax advantages at different times. If your company is expected to take a couple of years to be profitable and you have another job to offset then an LLC with straight flow through taxation is better. If you are profitable from the beginning then an LLC taxed as an S Corp. A C corp does have certain tax advantages to it as well. A C corp can deduct many things that an S Corp or LLC cannot. Having both structures working together can give you the biggest bang for the buck but takes working through your own situation.
Corporate structure is a combination of protection, simplicity and taxation.
February 14th, 2009 at 9:29 am
One important aspect to an S-Corp is that of reasonable compensation. An owner is required to take a reasonable salary out of the business if he is active in the operation. What is a reasonable salary? One that is comensurate with others in a similar business and this is not the easiest thing to figure out. Tax auditors have a great time teasing you with this one! You cannot just remove cash from the business and call it owners draws or dividends and escape the burden of social security, medicare and unemployment compensation. Death and taxes, noone can escape from them!
February 14th, 2009 at 1:57 pm
On advice of both my lawyer and my accountant, I formed as an LLC. After a few years, my account suggested that I file IRS paperwork allowing my company to file / be taxed as an S-corp. Sorry, I don’t remember the details or the forms, but it has worked well for me.
February 24th, 2009 at 8:37 pm
Tim,
Here is a great resource for all sorts of free advice from retired executives.
http://www.score.org/index.html